capital and having regulators who appear at this point unwilling to offer those so-called nonobjections to those asset transfers. now, the company is running out of time, as its liquidity erodes quickly. if it could secure the private financing and the 23a approvals, cit believes it could then buy enough time to pursue debt for equity swaps on some of its bonds, and have its capital structure properly aligned to prevent any future liquidity concerns. in other words, it would avoid chapter 11. cit's bonds with short term maturities have told off from 90 cents on the dollar late yesterday when it appeared a deal might be in hand to as low as 60 cents on the dollar this morning. if it the company is unable to reach a deal with regulators and investors in the next day, i'm told by people close to the situation, it will likely file chapter 11 tomorrow. of course, as this day goes on, we'll continue to have coverage and updates for you. back to you guys. >> all right. we are going to take you back to the paulson hearing now. thank you, david faber. >> well, it is -- i try not to

use hyperbole and explain something that it's impossible to ever prove, now that it didn't happen. but at least i believe -- i had -- when we had this debate, i had some people say, well, listen, look at everything that's been in place since the great depression. we can't have that. you know, we certainly couldn't go through that again. i looked at it -- the opposite. when i looked at in the world where information can flow, money can move, with the -- with the speed of light, electronically, look how fast this liquidity went, looked at the ripple effect and looked at when a financial system fails, a whole kre country's economic system can fail. i believe we could have been -- gone back to the sorts of situations we saw. saw in the depression.

i remember asking ben bernanke what he thought the world would look like. and he said, well, just take a look at what happened in the depression. but i didn't spend a whole lot of time thinking about that, because i knew it was going to be very bad, and i never wanted to experience very bad. i didn't want to ever get to the point where we -- where we could really understand it. >> gentleman's time has long expired. so let me move to the congressman from indiana. >> mr. paulson, there are those of us that don't agree with your analysis that going about solving this problem was the correct way. you know, if you look at the -- you talk about a meltdown, we have 9.5% unemployment right now. if you take into consideration those who are working part time or getting unemployment compensation, it's closer to 16.5%. there was an article in the

"wall street journal." so you are talking about how you guys saved the economy and saved the world. >> welcome to "the call," every one, i'm larry kudlow. henry paulson defending his role in the bank of america-merrill lynch deal right now on capitol hill. we'll continue our live coverage of the house hearing under way, and melissa, where are you hanging out? >> i'm melissa francis, i'm live at jpmorgan chase headquarters, the financials giant blew the door off earnings. we have details with the man of the hour, cfo mike cavanaugh. i'll have the exclusive interview coming up live in a little bit. trish. >> we have all your bases covered. i'm here at the new york stock exchange, 90 minutes into trading. we are trading up just barely there on the dow. you've got bank earnings being offset by concerns about cit. we are going to have all of the market news coverage for you, but lets go back to paulson. >> ben bernanke ever suggesting to me that -- >> you don't remember. you know, mr. bernanke said the

same thing. he said he didn't remember. >> but what i do -- so you ask where i came away with that view. >> yeah. >> and i participated in a number of meetings and calls, where chairman bernanke participated, there were lawyers from the fed, staff members from the fed. people from treasury. and i came away from that -- those calls with that understanding. >> well -- wait, wait, wait. you came away from that -- well, listen, just a second. if approximate you came away from that from those phone calls, somebody must have said, hey, we can't let them do this. and i would suggest that it might have been mr. bernanke. >> well, what i would say to you, i do tnot know whether someone in those conversations or calls expressly said it, or if my understanding came from just the town and the forcefulness -- >> you know, you're a very smart man. i don't think anybody is buying what you're saying right now. i mean, you guys were on a phone

call, there was a number of conversations and e-mails and you're saying that you didn't get any suggestion from mr. bernanke that he wanted you to let them know they were going to be fired if they didn't do what you said? >> i said i clearly came away with the understanding that this committee has in it which was substantiated by the e-mails released and some of the other things that that was the view of the fed. but i also don't remember ben bernanke ever talking about that possibility with me. >> it's interesting that both you and mr. bernanke can't remember. let me just read something here that really concerns me. first of all, they expected a $9 billion liability, and a few days later, they found out it wasn't $9 billion, but $12 billion. and so they were very concerned that they weren't going to be able to swallow all of that, and that's why they said they wanted to change this, and use the mac provision. and you didn't want to make that public. you didn't want to make any of

this public. why not? >> well, let me say to you that that is not a fact. the only -- this came up in connection with ken lewis asking me for a letter from treasury. and what i said to him about a letter from treasury is i said, ken, we do not have any kind of a specific agreement here. we haven't decided on the size of the program, the dollar amount, we haven't decided on how many assets. and so if i gave a letter, all i would be saying is what i've already said publicly, which is that b of a is systematically important, and that we are committed to -- >> here's what we said -- >> committed to not having a failure. so my -- let me just finish. >> you're using up all my time. >> what i said is the opposite. >> mr. paulson. mr. paulson.

please pull the mic closer to you. >> oh, sorry. >> if we give you a letter, we will disclose it is what i said. >> here's what was said in testimony. bernanke and paulson insisted that lewis rely solely on their verbal assurance of more support, because as paulson told lewis in a written pledge, quote, to be a disclosable event, and we do not want a disclosable event. >> well -- >> and he goes into more detail than that. >> well, let me say, lewis has testified clearly before this committee that i never, ever suggested to him that he delay any disclosure. what i said to him was something i would expect you all would agree with, which is if we're going to issue a letter from the treasury, i'm not going to issue a letter without disclosing that letter. and i don't see the point of a letter, because we have no specific agreement. there's nothing to write down. we don't have the size of the

program, we don't have the dollar amount, and we've already publicly said -- >> you gave him verbal assurance, but you wouldn't put it in writing. >> i gave him verbal assurance that we were committed to working to get something done. >> why didn't you want to but it in writing? there are several places he says that you would not allow it to be put in writing. you didn't want people to know, you didn't want public disclosure. why not? >> well, because i attempted to answer, i'll answer it one more time for you, sir. what we -- i had already -- >> mr. chairman, we ask the witness again to speak into the microphone? i can't hear. >> mr. paulson. >> i'm sorry. i had already said publicly, as had the fed, that we were committed to working to prevent the failure of any systematically important institution and bank of america was one. now, going beyond that, we had had -- made it clear that we were going to be working with him to develop a support program. but we didn't have a size, we didn't have -- amount of assets

that would be covered, we had -- we didn't know what form of equity and how much. we had nothing definitive to say. and so i said, i don't see how a letter is going to be meaningful or helpful, but if i give you a letter, we're going to disclose it. and is then that got twisted around to say i didn't want a disclosure. >> i know my time is up, but let me read one thing real quick, mr. chairman. here's what he said, "i was instructed that, quote, we do not want a public disclosure." that's what he said, flat out. >> well, he has testified something different before this committee. >> mr. chairman? >> i'm sorry. his time is expired. >> i have a procedural question that mr. paulson clearly is moving back and forth. is there enough slack in the mic, the mic could be pulled more -- >> i got it. >> if you pull it back that direction. >> thanks. >> thank you, very, very much, much. mr. paulson, we are having problems hearing you. >> yeah. >> but the gentleman from

massachusetts, mr. lynch. >> thank you, mr. chairman. mr. secretary, i want to go back to the line of questioning suggested by mr. jordan of ohio. i also sit on the financial services committee, you testd at least a half a dozen times before that committee prior to the t.a.r.p. vote. you did, indeed, in all of your testimony, along with mr. bernanke, express the intent, the central intent, of this t.a.r.p. program was to buy toxic assets to get the economy moving again, and to get folks lending again. and you pounded away at that central theme. and what mr. jordan was saying, that a matter of days went by, and you changed completely the focus of that program. now, in my opinion, you misled congress. when you were asked by mr.

backus in the financial services committee, he said wouldn't it be more impactful -- i'm paraphrasing, to just inject the money directly in the banks, and what was your response? >> i believe i said right there that -- >> you said that wouldn't work. you dismissed that. you dismissed that in open committee. >> right. >> which led members of congress to believe that you weren't going to do that. now, hear me out. if you had come up here with mr. bernanke and said, i have got a plan, i want to take $800 billion in taxpayer money, and i want to give it to my pals in the nine biggest banks of america, how many votes do you think you would have got up here? and that's why -- that's why i believe you have misled congress. let me ask you something else. this conversation that you had -- you had had a conversation december 26th -- 22nd, i believe it was, with mr.

lewis. according to his testimony, you were on a bike ride. and he says that you spoke to him, you were on a bicycle, he was able to catch up to you. >> which date was this? >> i'm sorry? >> what date was this? >> december 21st or 22nd. i actually have it in my notes here. >> i happened to be out skiing. it would have been an interesting bike ride. >> well, he is saying -- whether you were on skies or a bicycle, that's not important. i want to know what you said. what did you say to him directly? give me the gist of this conversation. paraphrase it if you must, but tell me what you said to him. >> which conversation on the 21st? because i had two conversations with him on the 21st. >> well, the one in which he says that you stated that there was a real threat, or the real

possibility -- won't use the word "threat" that he could be removed and the board could be removed. >> right. >> under the emergency fed power, not by treasury. that conversation. >> okay. this conversation was one where i -- where i said to him, number one, that the -- that the treasury and the fed have communicated publicly, that we are committed to prevent failure of systemically important institutions, and bank of america definitely is one. number one. secondly, that we believed that the exercise of a mac clause would show a lack of judgment. and if he did so -- >> what you said to him. >> yes. and if he did so, it would destabilize both the --

destabilize bank of america, merrill lynch and the financial system. and under those circumstances, the federal reserve could replace manage and the board. >> did you have a conversation with mr. bernanke prior to this, that you were going to have this conversation and be put on the line like this? >> the conversation i had with ben bernanke, i did have a conversation before this with ben bernanke. i had received a call from ken lewis telling me that he had been giving more thought to situation, and he and his board were increasingly concerned, and were considering exercising the mac law clause, and i had a conversation with ben bernanke before happened. but i will say to you, i have so many conversations with ben bernanke, i have a trouble distinguishing one call from another. and the call i had with him was not one where we were saying, now, let's get our script down.

i had a conversation with ben bernanke, told him i had heard from lewis, and then afterwards, i got back to lewis with a conversation i just gave to you. >> let me ask you, either on skis or on a bicycle, was anybody with you when you made this call? >> i made the call from -- no. i made the call from my living room, and at a ski cabin in colorado. >> and there was nobody else in the room at the time? >> unless one of the kids were running through the -- or one of the grandchildren. but other than that, i think i was by myself. >> all right. my time has expired. i yield back. >> thank you very much. i now yield to the gentleman from florida, mr. mica. >> thank you, mr. chairman. you just spoke about some conversations with mr. lewis, and if i could just clarify, i guess mr. lewis claims that he

first learned of the $12 billion financial loss of merrill lynch on december 14th, which was nine days after the shareholder vote. now, you just testified that he called you at that point and told you he was strongly considering backing out. is that what you were referring to just a moment ago? or was it a conversation later on december 21st when lewis informed you that he was considering backing out because of financial losses? >> all right. let's just break in for a moment. we have some instant analysis, as always, from our expert panel. today we are blessed with by robert mctier, former president of the dallas federal reserve and a cnbc contributor. and we have cnbc's senior economics reporter, aka, the great, steve liesman. good morning, gentlemen. bob mctier, as i read this story and i heard mr. paulson's

testimony, and i liked it very much, he is basically saying i put the wood to ken lewis in the b. of a and i was right to do so. what's your take? >> i agree that's what he said, and i think that was the right thing to do. and he sort of explained some of these discrepancies that have gone around. he mentioned that the fed had the authority, as the principle regulator of the bank holding company, to remove management and the board. and he said he said it. ben bernanke didn't say it. and so no good deed goes unpunished, apparently. i'm a little bit embarrassed for this the in. >> yeah, i think this committee is looking pretty pathetic. steve liesman, my thought is this goofy committee is looking for a needle in the haystack. and you know what, steve, if they ever found the needle, it would be so rusted as to be completely unusable and unnecessary. what's your reaction? >> you know, larry, i think it may be worse than that. i think what they're trying to do now is because they don't really have a charge here is trying to get them to go back

and really either purger themselves or contradict their testimony saying, well, you said there was no needle. that's where we're at right now. this issue of did you threaten to remove the management -- i think bob mctier can tell us, it has been and will be in the purview of the regulators to remove the manager under any circumstances, let alone these very dire circumstances that we went through. i am waiting and i would like to hear what the actual charge is here against paulson. >> all right. we're going to go back in. we have much more to say. we've got some steamed-up people here. mr. mctier and mr. lease son, and i'm custody kudlow. let's go back to the hearing. >> it's my understanding that you had information relating to possible back-up plan by british regulatory authority, and that there were back-up plans if, in fact, they didn't go through with the deal. you're not aware of any back-up plans? >> i don't know what -- >> that was the only option? >> the -- i don't know what

the -- the -- you know, we certainly had -- we had our t.a.r.p., and we were low on capacity in the t.a.r.p. but we -- i don't know anything about british -- >> well, i have information here we'll put in the record. we have had recent discussions with bac and ml management who contend that they have the required shareholder support and are confident that a transaction will be approved with tomorrow's vote. if approval is withheld, ml will continue to have access to the various facilities and programs currently in place in the united states. additionally, it is reasonable to expect that ml would be provided necessary support to preclude sufficient systemic disruption. are you aware of that? >> i assume people are just -- you're talking about a board

report, where they're talking about access to fed lines, or the fact that we've -- >> from the richmond fed to the u.k.? >> yeah. i'm not aware of that. >> you're not aware of it. and you were never aware of any back-up plan, yet the only thing -- and you never threatened lewis to remove him or his board. >> well, you keep putting words in my mouth. i've -- now told you three times, and told the committee repeatedly that, of course, i told lewis that we would -- the fed had the authority to replace lewis and board. >> so you did tell him that you had the authority to remove him and the board. >> i told him that the federal reserve could replace him and the board. if it -- if he pursued the course of invoking the mac. >> and, again, for the record, you were not aware -- you're

telling this the in, you're not of -- aware of any contingency or back-up plans, other than your holding mr. lewis and the board to the deal that you wanted to impose. >> i'm saying that our -- our -- my plan and my preparedness was to get ready with the support package when the company announced the earnings. >> mr. chairman, i have some information contrary to what the witness is testifying, and i would like to ask unanimous consent that be made part of the already. >> without objection, so ordered. >> thank you. yield back. >> and then yield to the gentleman from illinois, mr. quigley. congressman quigley. >> thank you, mr. chairman. mr. paulson, i guess i want to put this in context of what didn't happen with lehman. and i believe the expression you

used was "moral hazard." which is the notion of bailing out institutions, inviting more risk-taking. is that a concept, is that a term you would now not use anymore? >> no, i think moral hazard is a very important concept. and i do think when we have a regulatory system that's in balance, and you have the wind-down powers that the administration is requesting, and hopefully congress will pass, it let's a nonbank institution fail without disrupting the system, that moral hazard will be -- will have more teeth in it. >> so why was lehman a moral hazard, and not bear stearns, fannie mae, freddie mac, aig? >> okay. i would actually thank you for the question. that we -- i believe quite

strongly that if we, if -- if tim geithner, ben bernanke and hank paulson had found something legal we could have done to save lehman, we would have. and let me explain the difference. the -- in lehman brothers, there was a liquidity problem, and a capital problem. and we were unable to find any buyer to come in and make the acquisition on an assisted basis or an unassisted basis. and so although the fed was able to loan against lehman collateral and did loan to help facilitate liquidation and bankruptcy, a fed loan would not have saved lehman brothers. in the case of bear stearns, we had a buyer, jpmorgan, and

jpmorgan then -- the fed was able to make a loan to assist that acquisition. bear stearns was a liquidity problem and a capital problem, and jpmorgan took care of the capital problem. they were able to -- to guarantee the trading book while the merger was being voted on. aig was a different situation, because in aig, the perception at the time was, this is a liquidity problem only, because we had -- they had a number of stable regulated insurance companies that were perceived to be well-capitalized and were california lot ral for the loan. so we faced this situation in lehman brothers, where we did not have -- the government didn't have wind down powers, the government didn't have powers to inject capital. that came after we got the t.a.r.p., and we didn't have a

buyer. and so there was no power that we could find to solve both the liquidity and the capital problem. >> did bank of america request your assistance to purchase lehman? >> did bank of america? >> yes. >> we went to bank of america repeatedly, and bank america asked each time for more assistance, and we had the -- we had the private sector ready to fill gap. but the -- but bank america, in my judgment, was never serious about it, because each time they showed less interest, and it turns out they were -- they were interested in merrill lynch. we another buyer, barclays, that we thought was going to do the deal right up until sunday morning. >> well, let me just ask one more question, given the short time frame.

most of these other groups that were saved, aig, fannie mae, freddie mac, the management was replaced. lewis wasn't replaced. was his situation different, or did -- and in short, did you promise him he could keep his job as he did it this way? >> absolutely not. the -- these are -- these decisions, for the government to come in and take the responsibility away from the board and replace the board, there's got to be a very good reason. and fannie, freddie, aig, there was good reasons. but i also looked at this very pragmatically and said, these are big, difficult institutions to run. is the current ceo, is he capable of running this institution? and then you've got to say, who else is suitable to come in and run these institutions? >> i appreciate it, and my time is up. i guess you could see how that

appears to be splitting hairs of who you fire and who you don't fire. and it could very easily be construed to those who are making these decisions in these financial institutions that their first course, their first thought must be they have to listen to whatever you say it, they have to play ball or because you have such discretion, those who play ball keep their jobs and those that don't get fired. >> the gentleman's time is expired. mr. classic from utah. >> thank you, secretary paulson, for being here. i appreciate it. when this country experienced enron, there was outage from coast to coast. people who are not informed about the material things that were happening and not happening within that company. pause the shareholders were left in the dark. my concern is the lack of transparency to the shareholders, and to the public at large, not only as investors, but as investors -- as

shareholders, if you will, as being taxpayers in this country. so the question that i have, i want to get -- follow up on mr. jordan's question. a little deeper into why you did not share this information with other regulatory agencies, for instance, the s.e.c. why didn't you feel compelled to share informatwith them? >> first of all, we were working with the regulators that were involved with putting the financial assistance together. that was the effort. the -- >> but -- >> but the -- the -- responsibility, it is not a treasury secretary's job to get between a company and its -- and the s.e.c., for instance. >> but my understanding -- >> i've been around long enough to know, these are critically important decisions, and that's the responsibility of a ceo working with his general counsel and with the regulator. that's not -- >> but you were a participant in

the financial stability oversight board. i mean, one of the requirements with t.a.r.p. was that the financial stability oversight board, in which you had two meetings, and you did not inform the s.e.c., nor did you inform the office of the comp. controller of the currency. why is that? >> are well, let me be -- because i take exception with that. the and after a january 8th meeting of the financial stability board, i sat down with chairman chris cox, and i explained to him, it was still early, we didn't have the package together, but we were working on it. and i gave him the details of -- to the extent we knew them at that time. so on -- >> this thing was fully baked at that point. that was late in the game. let me go back to what -- >> no, this was otto owe. >> part me. let me go back to what attorney general andrew cuomo said, that hank paulson, quote, informed this office that he did not keep

the s.e.c. chairman in the loop during the discussions and notions with the bank of america in december of 2008. is that true or not true? >> what attorney general cuomo's office is talking about -- the question was in december. i -- i also explained to the attorney general in january, and that -- >> is the attorney general's statement true or not true? and i'll read it again. quote, informed this office that he did not keep the s.e.c. chairman in the loop during the discussions and negotiations with the bank of america in december of 2008. >> in december, i did not. that's absolutely correct. >> and you feel no obligation -- the one agency that is out there as an advocate for the shareholders, you didn't think that that was an important effort on your part, or you didn't feel any obligation to share with the s.e.c. or other regulatory agencies? even within your own agency, your office as comp. controller of the currency? >> i would -- again, let me say

two things. separate. because you've blurred two things. first of all, with regard to the relationship of bank of america to the s.e.c., that is something that is not my responsibility, it's not the responsibility of the fed. that's the role of bank america to work with the s.e.c. with the financial -- with the financial stability oversight board, because this has come up now several times -- >> right. >> we did not begin to have this together until we brought it to the financial stability board, and there was a full and thorough airing there. and -- >> but that was so far after these deals were already cut. >> these deals were not cut. these deals were not cut. that's where there is a misunderstanding. there was an understanding that we were going to work to get something done, but we had nothing specific to bring forward. and the other point i made was on january 8th, in his role as a member of the financial

stability oversight board, i gave chris cox a briefing. >> i think, mr. chairman, what needs to be explored further is that i wasn't here. i'm a freshman. you wouldn't have wanted me here, because i would have voted against this t.a.r.p. i think it's an absolute disaster. but i've got to tell you that i think this congress or congress before this did set up this financial stability oversight board to precisely make sure there wasn't this audacity of arrest owe dance that would be held in just one or two persons' hands, and that there would be more involvement from other agencies that are very relevant. and to exclude the one agency that has shared and that is tasked with taking care of shareholders, i think is inexcusab inexcusable, and i think we need to dive into further. i see that my time is expired. thank you, mr. paulson, and thank you, mr. chairman. >> thank you, very much. all right. we're going to take a quick

break from the hearing. i'm melissa francis live at jpmorgan headquarters. i'm joined my mike cavanaugh, the cfo on the heels of the blockbuster earnings report today. let me ask you quickly before we get to that about cit and jpmorgan's exposure to that, since that's our other huge story of the day. what's your exposure? >> sure. no material exposure, melissa, so we're fine. >> any counter party risk or anything like that? >> no, nothing that i would expect to create any material issues for us. >> okay. let me ask you about the quarter. blockbuster revenues, $27.7 billion, way more than people expected. is that sustainable? >> well, you know, let me tell you about a quarter per second, so $2.7 billion to profits. obviously, against a tough economic back drop, which we have been having, we have to be pleased with those results. 28 cents a share, 2727 of revenues. that's revenues in the quarter are a record. also before credit costs, pretax profits of over $14 billion in the quarter. so both those numbers are records for the quarter and the

year. obviously, very strong results in the investment bank, $2.2 billion of investment banking fees on all of the underwriting activity that went on in the quarter. best for us ever, and best for any firm ever in a quarter on that $2.2 billion feline. also records and in fixed income markets. but it was continued strong profits, commercial bank, treasury services, asset management and retail banking. the branch side helped by the wamu acquisition versus a year ago. but offset, obviously, by continued high losses, credit losses, and particularly the consumer business credit card and mortgage lending. >> let's talk about that a little bit. because the criticism is that nonperforming loans, you know, were more than expected while, you know, additions to loan loss preserve were maybe a little less than expected. how do you address that? >> okay. not more than i guess we expected. we focus heavily on future expected actual losses. losses on loans of all sorts. we talk a lot about that, and are very early to add to

reserves. were very early. two years ago, we had about $7 billion of loan loss reserves, which cover you for these increases in losses. now they're at $30 billion. so we added another $2 billion on top of $4 billion earlier in the year. that come out of our earnings. so the fact that we've made money every quarter through this crisis while building up that kind of reserve position, together with $122 billion of tier one capital and 9.7% capital, all of that factors in our views and expectations on future credit trends. and so not concerned by that observation. >> do you feel like you're almost done adding to those loan loss reserves or do you figure you have to do more? >> we don't know what the economy is going to do from here, so i can't predict with any certainty. but we have seen and talked about on "the call" earlier some signs that maybe we're getting close to being done with loan loss. >> like what? >> obviously $30 billion is huge, 5% of loans. the what is really on the consumer side.

particularly in the mortgage area. home equity loans, prime mortgages, subprime, areas where we have been, frankly, surprised by how severe the losses have been progressing over the past two years. for the first time in this crisis, we have seen what we call early bucket delinquencies. this is people going late the first payment or the second payment stabilized over the last 60, 90 days. and both in terms of numbers and dollars. if that trend continues, that's a very good sign, and we could be getting to the point where we're almost done on adding to reserves. losses may still trend higher for another couple of quarters, but that would be the point at which you would get to the end of adding to reserves. >> so rather than getting more and more people delinquent on loans, it seems like -- stabilization. >> early stability. same in the credit card business. and another thing we look at, just to get a feel for where the economy might go is spending on credit cards. so what is the consumer doing? so we have observed coming off the fall of last year, as we all

know, tremendous drop-off in consumer spending. and we watch it weekly, what goes on on our credit cards, and we have seen again over the past couple of months a stabilization. it's lower than it was spending levels from a year ago. but it's better than it was at its worst earlier in the year. and has been running at a stable level. so those are things we look for. and like we need to see them continue. we're not yet ready to call it, but that it's going to stabilize and stay there. those are the things to look for to see if that -- that and unemployment. where unemployment goes from here is an important factor in all of these -- and home pricis and consumer loss. >> do you have a prediction on that, where you think employment is going from here, when it will peak, how big it will get? >> no prediction on peak. we continue to see a trend higher in the second half of the year from here. beyond that, it's going to be more a factor of plenty of other dynamics going on in the economy that are too hard to put a finger on. but hopeful that maybe we see a peak soon after the latter part

of this year. and then it's going to be, what does it mean? what's the quality of unpromote? if unemployment stays at a certain level, is it some people keeping a job and new people losing jobs, so that there is a sustained high level of unemployment, or does it peak and then start coming down? what's the nature of job recovery. >> what's your guess? what are you guys thinking? >> very hard to see. we're not seeing a lot of job creation now. of but depending on what companies see, because that goes into what companies see. so we're looking to see how confidence in the ceo sweep behaves later in the year as people plan budgets for next year, we'll have effects on that. >> there is a lot of criticism that you guys aren't lending enough money. jamie dimon has said there isn't enough demand. what is demand for credit like right now? >> i mean, our commercial bank, one of the leading middle market lenders in the country operates in all of the states where we have retailed branches. we actually saw loans come down quarter over quarter a little bit, 4% down to $105 billion of

loans outstanding. yet we are eager to grow and invest in that business. and, in fact, are opening up commercial banking business operation in california where wamu never had one, so we're hiring people and expanding business, yet demand is down. companies are being a little cautious right now, so demand is lighter. and then larger companies that have excess cash lying around are paying down balances. so we see a little pressure on the demand side right now on the commercial side. >> and you said you see commercial real estate getting worse for a few more quarters to come, or what does that look like? >> commercial -- a lot of questions about that on the earnings call. it's not a big exposure to us. no pnl impacts to us in this quarter. a little additional reserve in there, but not much. but what we do expect, it's just the follow-through, as consumer losses increase, and corporations have their problems, it goes on into demand for commercial real estate by tenants coming off. so we expect that to be a

lagging credit trend. it will get worse from here. steadily through probably the remainder of this year in 2010, at least. >> at least. when do you see a turn-around do you think? >> that one is a tough one. once the economy itself turns, unemployment stabilizes, consumer stabilizes, it could be that it's -- you know, quarters -- you know, beyond that. maybe a little longer. >> let me ask you you about bear stearns and wamu integration, bear stearns first. what percentage of those people still work for you? >> well, we said about the time -- at the time, about half of the bear stearns people and the investment bank ended up with jobs. and about the same number of people that lost their jobs from bear stearns -- jpmorgan people in the same numbers also lost their jobs, because remember, we're -- we're putting together companies in the context of very, very tough times last year. so we think we did a good job putting the best athletes, so to speak, in key jobs. integration is done well. bear stearns is making a contribution, especially in prime services, and say commodities. >> and wamu, you know, is a

business that's known for low fees for low margin checking accounts. you know, you've had to pay higher interest rates to attract people. are you raising fees, as well? or how is that going? >> well, we'll see. this year -- this quarter already, we saw a nice contribution in retail banking, profits up 300 million year over year, and that was largely due to having washington mutual in the retail business. we stabilized the deposits, within days after our acquisition from the fdic when they seized it. much up until then, deposits were running off almost immediately in october and it was called two or three weeks after the deal, we had seen stabilization. so from here, we're just now starting to run the business. the chase way. new products, better products, adjusting, the price we pay on deposits to be appropriate for our lower funding costs. so we'll see some high-cost deposits that wamu had run off probably in the second half of the year, and we're fine with that. >> you're out from under the t.a.r.p.

obviously you saw this week goldman sachs already getting a little bit of backlash on the compensation issue. how is compensation running for this year, and are you worried about a backlash, or do you feel like it's your bank? >> no, i mean, i'm not worried about a backlash, because i think we've always done fair and appropriate practices, best practices and compensation will continue to do so. just remember, it's early in the year. we still have a half a year to go, so i think it's a little -- it's early for us to even be contemplating exactly how it's going to play out. it will be based upon performance. and as i said, different from maybe other places, we've got a lot of different performance stories when you look across the six businesses inside our -- inside our company. so performance compensation will follow the performance in each business and be done on a very fair and consistent basis. and business by business, we'll make sure we're competitive, as well. >> but you know about where you're running, are you running twice last year, or -- >> it's lower than that. i don't have the number off the top of my head, but it's not at that kind of level. we're going to -- it depends,

again, by business. investment bank is certainly up nicely from where it was year over year, but, again, we're only halfway through a year in a business that has plenty of room to see where the remainder of the year turns out. businesses where credit costs are very high, and for the company as a whole for senior management team, we're well aware that overall performance is not as improved as it is in some of the units. >> how is the investment bank business doing? one thing we had heard earlier in week from goldman was that the backlog is dwindling a little bit. are you experiencing the same thing and how do you beef it up, if so? >> the backlog is really a function of what our customers want to do, and whether the markets stay open. so i think those two go hand in in glove. there is a lot of activity that happened in this recent strong quarter that wasn't in the pipeline going back to the beginning of last quarter. so i think as we said on "the call" today, it's a decent amount of pipeline activity, but a lot of it will be the function of how receptive the markets

are. because there are plenty of clients who do have interest in taking a look at their balance sheet, maybe more on the debt side than the equity side as we saw in the second quarter, and looking to reposition, looking to 2011, '12 and '13 where there are big debt ma tirety profiles coming in, and a lot of conversation about getting ahead of that. >> let me ask you one more question about commercial real estate. you've got to be one of the biggest holders in manhattan. you've got wamu, bear stearns, chase, chemical. is that a potential problem going forward with all of the branches? if commercial real estate continues to deteriorate? where do you stand on that? >> no. anything we use for operating our business is just like any other cost we manage in the company, and we're doing a fine job with that. so no concerns with us as a user of commercial real estate. we're obviously large, and we're obviously like every other expense we manage here, trying to be thoughtful about doing the right thing for the shareholders there. >> and on the revenue side, a lot coming from trading, as well. was it -- you know, it was a

good quarter for a lot of people in terms of the end of march. do you think you can keep that going in the next quarter? is. >> what i see is, we have done a good job in the investment bank books, both on the corporate finance side, the fee side and in the trading side of attracting very high levels of client interest in doing business with us. we throughout the crisis were making markets desk by desk, committing capital. so we believe we've gained market share that we expect to hold on to. also, as many people have talked about, this first half of the year, spreads are wider. what you get paid as being a risk intermediate area is better than it has been back in 2007. that is starting to narrow, as you and expect, as things get more and more normal. but client levels of activity continue to be high. so probably the level of revenues could come off a little bit. but not a -- we'll have to wait and see, i guess. >> okay. mike cavanaugh, cfo of jpmorgan chase, congratulations on a

great quarter. thanks so much for talking to us. we go back now is the arch paulson hearings in washington. >> nonbanking institutions if they get in trouble so they don't have to be bailed out. the only other thing i would say to you was, i am not disputing the fact that when ben bernanke and i came to congress, we understood that illiquid assets -- because illiquid assets were at the heart of the problem in the financial institutions. that was at the heart of the problem. that was a major cause for the losses. for the illiquidity, and so our approach was to buy those illiquid assets. that was our primary approach. and we learned, and as the situation began to crumble all around the world, and it was so clear we had to move quickly, we needed to change gears. and is i made the decision that when the facts change, you need to move quickly and change. and i'm just saying -- the only

point i was trying to make wasn't to say we didn't come to congress and ask for illiquid assets, but thank goodness when we came to congress, we also asked to have some flexibility, and congress gave us the flexibility. and so -- and the last point i would make is, the people i care about are the same ones you care about. the american people. the people that are going to lose their jobs. and the -- the tragedy is, they didn't create the problem. the big banks created problem. it's a whole lot of -- the problem was created not by them. but they would be the one that would pay the greatest penalty if there was a collapse. and so that was what i was working for. of. >> gentleman's time has expired. i now yield five minutes to the gentleman from california. >> we've been listening to former secretary hank paulson, and now dennis kucinich is joining us, live from capitol hill for us.

welcome, congressman. >> hello. >> i was listening to your questioning this morning, you were highly critical of the former treasury secretary. you were also very, very much emphasizing the danger that too much government could, in fact, represent. but let's drill down here in terms of what paulson may or may not have not done. do you believe he, in fact, did anything that will be considered illegal, and at the end of the day, wasn't it up to ken lewis to make the decision for his shareholders himself? >> well, ken lewis certainly had a responsibility to inform his shareholders of conditions at merrill lynch prior to the vote. that's true. but the question that we have of mr. paulson is if he was going to use ken lewis's invocation of material adverse clause as a reason to remove him, which, you know, obviously would have reflected an unwise but lawful decision by mr. lewis, why wouldn't secretary paulson take action to remove management and mr. lewis, if he knew, and apparently he did know, that

merrill lynch had all these losses, and that bank of america didn't inform its shareholders? the shareholders. so, you know, on one hand, you have a -- a signal being sent to wall street that if there is potential misdeeds, you could still stay in the game. that creates a moral hazard which in a sense tells wall street, look, don't worry about it. we're all on this together. we're not going to throw you out of your management on one hand, but if you don't go along with the program, you could stay in. >> paulson as trying to think about the comment or the overall good of the system and thinking that if you you had this merger, if, in fact, it went through, then it would be better for everyone at the end of day. yet at the end of the day, it's still up to ken lewis to make the decisionful i mean, did paulson really do anything? i mean, yes, it might have been wrong, but it wasn't illegal. >> well, wait a minute, now. you know, it's an s.e.c. violation if someone doesn't inform shareholders of material conditions that could cause

their vote to be against something, and clearly bank of america failed to do that. however -- >> and that was lewis, though. >> not clearly. not clearly. >> that was lewis. >> dennis, mr. kucinich, may i ask you there are so many insist sees what you're saying. half your committee is saying paulson shouldn't have put a gun to lewis's head. paulson himself says, of course i did, i had to for the sake of this country's future. now you're saying, not only should he have put a gun to his head, he should have fired him. well, which is it going to be? is a gun to his head, fire him? i mean, none of this makes any sense to the viewer, to investors, whatsoever. >> no, wait a minute. mr. paulson has said that he was ready to fire him if he invoked the material adverse clause. the question that i raised, if he was ready to remove him for that, why wouldn't he remove him for not notifying his shareholders about the condition of merrill lynch prior to the

vote by the shareholders? is. >> because lewis -- but sir, lewis told your committee, in no uncertain terms, that they did notify shareholders at the appropriate time in early mid january after -- >> after the vote! >> after they were completed. >> are you kidding me? he notified them after the vote, about the condition of merrill lynch? i mean, come on. you're talking about -- is that the way you protect shareholders? after it's over, you say here's the situation. no. he had an obligation to notify them before the vote. if we're talking about a crisis of confidence, we have to have the ability to tell shareholders that things are legit. they weren't legit for the shareholders of bank of america. >> with respect, sir, i think the shareholders were very much aware of these negotiations and trading on the fact that the asset losses were bigger and there is no proof -- you have no proof -- >> you are making this up. you're making it up. >> i am not making this up. there is no proof in lewis'sç testimony, bernanke's testimony -- >> okay.

hang on, guys. hang on. hang on. i've got to go back here, because i'm still confused, and it's what larry said earlier. congressman kucinich, i'm still confused as to what your problem here is, you're upset because paulson didn't fire lewis for not letting his shareholders know that there was an issue? >> he should have taken action, there is no question about it. there's just no question about it. this was an obligation to the shareholders and to the economy, for that matter. that's the point we're making. but to say that you can notify shareholders after they approve it and that's just -- you know, that is in effect adequate, you've got to be kidding me. i mean, how can you even have a show about this when you say shareholders can be notified after the fact? >> we're going to go back to the hearings right now. we thank you for joining us today, congressman kucinich. >> always a pleasure. >> and let's go back to paulson. >> here what we did is, we communicated to the market that we had a terms sheet. the market knew that this deal

wasn't closed yet. we were announcing a deal with the intent of closing it. and why it didn't close, you'll have to ask people that are in treasury today. >> mr. chairman, i certainly would hope that we would question further who was responsible at that point in time for these negotiations so we could have them come before this committee. i yield back. >> good point. thank you very much. i now yield five minutes to the gentleman from indiana. mr. saweder. >> mr. paulson, had mr. geithner signed off on that memo, the terms of deal? >> what did you say? >> in other words, you were just about to transition between treasury secretaries. as mr. geithner or the incoming administration signed off on the tentative terms? >> the -- mr. guyner, as you know, was the treasury secretary designate. and we wanted there to be a very smooth transition. and so i posted him generally on a number of matters, including that matter.

but i never viewed him as a decision maker. and i certainly didn't go to him to sign off on the details of that term sheet. >> i have a larger question i want to pursue off of mr. lewis. but i want to correct the record on some things that i think have been misstated. as somebody who voted for all three versions of t.a.r.p., took incredible political heat in the middle of a tough, targeted race. i believe it was the right thing to do, and i would do it again, with some additional caveats. but there has been a lot said today about the restrictions that were put on you. in fact, you came, in my opinion, not very tactfully, and told us that you wanted basically a blank sheet of paper with whatever you wanted to do. initially, they didn't need any republican votes. paul ryan and others in our caucus negotiated some 20 pages of additional things. but the bottom line is that we left there, ordered secretary of

treasure and those responsible can do whatever they think they need to do. now, we can try to pass blame, we can try to say whatever we want and in the future probably need to tie it down more, but at the end of the day, our conference, after hours of internal debate, knew that given the nature of the crisis, we had signed a blank check for good or bad, that we were going into an election season, we were about to leave town, it was getting highly politicalized, things were changing. i'm not defending the decisions that you made. i'm just saying it's a little bit much for members of congress to claim that there are all these guidelines in place, because we knew full well, you had an opt-out clause. now, that said, clearly you misled us, and we probably wouldn't have had the votes, even though we underneath knew that was there, because we understood it was toxic assets. we didn't believe you were going to take over, and the way this was going to evolve. had we known that, the bill would have never passed, or we

would have put tighter restrictions in. because what i would say, there was a verbal misleading, even though if anybody read the document, it actually gave you a total blank check. now, i would also say, i don't understand where people are saying that we weren't in a crisis. every 48 hours for three months, somebody was calling me, telling me a bank was either calling their revolving loan, the mark to market was tightening up their assets, so the banks were having their assets drop, people who were never late in their history, people who didn't know how to get their payroll dollars, major corporations in this country were having to borrow overseas from third world countries in order to meet their payroll. and that i don't know where it would have gone. i represent a district that is the highest unemployment in the united states. that i have either -- clark county has been first in unemployment all the way through. but they're 57% manufacturing, 17.6% right now unemployment. we were headed to a lot more than we are now. i'm not necessarily happy with everything that's happening. but it could have been a lot

worse. i don't know how catastrophic, but in fact, it's relatively stabilized, in that i think there's -- that we can have differences of opinion of how to do it. now, here's my concern about what i saw in the lewis thing, and where it's evolved. when you intimidated, at the very least, mr. lewis, into saying the government is going to do it, somewhere in here we went from toxic assets and loans, and your stated goal to us was, we didn't want the government micromangaging and directi directing. that was the next step, the lewis process. then you say when you handed it over, you thought you had a process, but then you don't really know what happened after that. since then, we now have common stock in banks, we're telling them on bonuses, micromangaging. tomorrow we have a proposal, now that we've taken over stock in gm, to tell gm that they can't close dealerships. now, this is the problem when government starts to take over. if you were treasury secretary now, where would you have started to draw the line here? you started to walk into it with

mr. lewis when you realized that it scrambled. would you have moved to common stock? do you believe this has gone too far? what lessons can we learn from what we have seen here, because right now, the government is in so deep, that getting out is going to be very difficult, and we're micro managing and congress is going to start to tell people what kind of tie they can buy if we're not careful. >> to me, that's the right question. and one of the things that was most difficult for me is i came to the job believing totally, and i still do, in markets and free enterprise and not wanting to see government overly involved. and so i was forced to make some decisions which were very objectionable, but they were better than the al active. and i thought -- i thought the -- the decisions we made

were going to ultimately help to preserve the markets. so i think the key question is, not only how do you get into these programs, but what's the right exit strategy? what is the right exit strategy? when is the system stable? and when do we get out? and i don't think that it is appropriate for me as a former secretary of treasury five months out of a job to be no any closer to it than i am now to be -- to be saying more than that, other than because i think everyone here understands that -- that government has been forced to do things. i think forced to do things by not only a unprecedented crisis, but forced to do things because we didn't have the tools we needed. there would not wind down authorities -- there was nothing to deal with, a failure